Saturday, 21 October 2017
Digital currency and GST: no more double taxation
Date : 20 July 2017
Author/s : Arthur Davis, Daniel Goldberg, Ryan Doherty
Type : Focus Paper
 

 

In good news for digital currency in Australia, the Commonwealth Government has announced its intention to treat digital currency in the same way as money for GST purposes from 1 July 2017.


On 29 June 2017, Treasury released an exposure draft of proposed changes to the GST legislation for submission and comment.1 While a number of technical amendments are proposed, the key change is the removal of the double taxation of digital currency.


This is consistent with the Government’s stated commitment to encouraging entrepreneurial innovation, particularly in the fintech industry, and should be a boon for consumers and emerging Australian digital currency start-ups.
In this paper, we outline the major proposed changes to the GST regime and how they’ll impact digital currency transactions.


Like money, but different


As we sit here today, digital currency is not money for GST purposes. It’s not even currency. This was confirmed by the Commissioner of Taxation’s December 2014 GST ruling that bitcoin (a type of digital currency) is not “money” for the purposes of the GST legislation.2


To those unfamiliar with counterintuitive legal definitions, this may seem an odd thing to say about a digital currency (“well if it’s not money, what is it?!”). The key issue, however, is that digital currencies don’t fit neatly within the definition of “money” and associated concepts in the GST legislation.


Although the GST legislation says that “money” includes “currency”, the Commissioner took the view that this refers to “currency” in its legal sense: i.e. a universal means of exchange recognised by Australian or foreign law. Bitcoin, and indeed other digital currencies, don’t clearly fall within this definition.


Current GST treatment of digital currency


GST is generally payable on “taxable supplies”. While “supply” is defined very broadly, the GST legislation expressly says that a supply of “money” is not a supply (unless it is provided as consideration for a supply of money).
Given the current state of affairs, digital currency is not “money” and so GST may be payable on its supply. At present, digital currency users are therefore effectively subject to a double GST burden:

 

  • GST is charged on the acquisition of digital currency (e.g. buying bitcoin from an online provider); and
  • GST is charged again on the use of that digital currency (e.g. in exchanging it for goods or services).


Both the Senate Economics References Committee and the Productivity Commission realised in 2015 that this is not an ideal state of affairs, at least from the perspective of encouraging the use of digital currencies in Australia and fostering innovation in Australia’s digital currency sector.


Proposed changes from 1 July 2017


The Commonwealth Government has agreed with the bulk of the GST recommendations made by the Senate Economics References Committee and the Productivity Commission. The draft legislation released by Treasury aims to implement some of these recommendations by ensuring that supplies of digital currency are treated in the same way as supplies of money (specifically, foreign currency) under the GST legislation.


These changes will have retrospective effect and will apply to supplies or payments made on or after 1 July 2017.


What digital currency will qualify?


Not all digital units of value will count as “digital currency” for the purposes of the new GST rules.


To fall within the new regime, a digital currency must:

 

  • be fungible (i.e. fully interchangeable for use as consideration);
  • be capable for use as consideration for any type of supply and generally available to the public free of any restrictions (e.g. ‘loyalty points’ issued by a particular retailer, or ‘currencies’ used in an online game, would generally not qualify);
  • not have a value based on the value of anything else (e.g. shares in a company are not ‘digital currency’ because their value is based on, among other things, the value of the company’s assets);
  • not be denominated in any country’s currency (e.g. a currency whose value is pegged to the Australian dollar will not qualify); and
  • not have a value solely or mainly because it gives the holder an entitlement to receive, or direct the supply of, a particular thing (e.g. a voucher issued by a retailer would not qualify).


The intention behind these criteria is to afford special GST treatment only to digital currencies which have similar features to generally accepted fiat currencies (like the Australian dollar).3


Valuing digital currency


In line with the Commissioner’s existing powers in relation to foreign currency, the proposed amendments also provide that the Commissioner will have the power to determine the value in Australian currency of a taxable supply where consideration was provided in digital currency.


The road ahead


The proposed amendments to the GST law represent an important step forward for Australian consumers who use digital currencies as well as Australian businesses in the fintech space.


Hopefully, these changes to the GST treatment of digital currency will spark renewed interest in the possibilities of such technology and associated areas, such as distributed ledger technology and blockchain.


If you’re interested in further information about how the proposed changes might impact you or your business, please contact us.

 


1 http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2017/GST-removing-the-double-taxation-of-digital-currency

2 Goods and Services Tax Ruling GSTR 2014/3 (Goods and services tax: the GST implications of transactions involving bitcoin).

3 Treasury Laws Amendment (2017 Measures No.#) Bill 2017, Exposure Draft Explanatory Material, paragraph 1.20.

 

 

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